by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news of another major disruption in the global shipping industry, which will likely drive up costs for customers trying to move their goods around the world. We next review several other US and international developments that could affect the financial markets today, including a discussion of the upward march in US bond yields and new reports that China is blocking the shipment of critical manufacturing components to Taiwan.

Global Shipping Industry: Because of poor rainfall and low water levels amid an intensifying El Niño weather pattern, the Panama Canal Authority has announced it will throttle back the number of ships it allows through the canal starting September 3. The move will cut daily ship transits from 36 to 32. Coupled with other shipping disruptions around the world, such as the effective closure of the Strait of Hormuz because of the Iran war, the move will likely put further upward pressure on shipping rates, benefiting shippers but increasing costs for their customers.

US Bond Market: US federal obligations sold off again yesterday as investors became more skeptical of Treasury Secretary Bessent’s announcement of increased bond repurchases the day before. The yield on the 30-year Treasury rose to 5.24%, reversing most of the prior day’s decline. Other global bonds also sold off. So far today, longer-term Treasury yields are flat to slightly down.

• Because of the various forces pushing government bond yields higher, we think a wider and more sustained intervention would probably be needed to keep longer-maturity yields contained.
• As we’ve noted before, a sustained, concerted effort by the federal government to artificially cap bond yields would represent “financial repression.” Such a strategy could hurt bond investors because yields may be kept too low to compensate for price inflation, i.e., real yields could be negative.
• Therefore, as investors begin to question the value of US bonds and the dollar, we are seeing increased buying and price gains for alternative assets ranging from bitcoin and gold to European and Asian currencies.

US Monetary Policy: Coupled with recent data showing slightly slower price inflation and a drop in nonfarm payrolls, the government’s effort to push down bond yields also seems to be undermining investor expectations that the Federal Reserve will soon shift to interest rate hikes. Interest rate futures trading now suggests investors see a 65% chance that the Fed will hold its benchmark fed funds rate steady at its next policy meeting in September. They don’t expect a rate hike until at least December.

US Defense Industry: Erik Prince, the former chief of private security firm Blackwater, has reportedly teamed up with Ukrainian drone software firm Swarmer to launch a new private venture providing custom air-defense systems to companies, militaries, and governments around the world. The venture, Vectus Air Defense Systems, would design and operate the systems with a focus on keeping costs low.

• The news highlights not only the increased global demand for defense goods that we’ve long discussed, but it also illustrates how air defense systems are especially in demand.
• While today’s investors may be tempted to seek out manufacturers of military drones, it could be difficult to make money from such mass-produced, commoditized systems. The better investment prospects could well be in high-value, specialized drone components such as software or air-defense systems aimed at countering such drones.

European Union: Analysis by S&P Global indicates European oil refinery capacity will shrink by about 20% over the next decade. The report says European governments now mostly support refineries to ensure needed supplies of gasoline and other energy products. The problem is that investors are reluctant to support major investments to extend or expand the facilities, especially given expectations that increased use of electric vehicles will cut the demand for gasoline over time. The result may be that surviving refineries run at higher profitability.

China-Germany: New data shows that Germany’s automotive sector lost 42,300 jobs in the year through June, representing 5.8% of the sector’s total employment. As a result, the number of jobs in the sector is now at its lowest level since 2005. The decline comes as carmakers grapple with both falling profits in China and mounting competition from Chinese brands in Europe. The news will put further pressure on the European Union to put up higher trade barriers against China, which in turn will heighten tensions and invite retaliation from Beijing.

China-Taiwan: China has been restricting or delaying exports of key aerospace and optical materials to Taiwan since late last year, new reports say. Specifically, exports of materials based on germanium and quartz have faced difficulties clearing Chinese customs. As a result, whole industries in Taiwan are facing shortages and are having to delay shipments to their customers. The development suggests Beijing has become more comfortable with a strategy of strategic export bans to extract concessions from governments beyond its borders, including the US.

South Korea: Semiconductor giant Samsung Electronics today said it will return the equivalent of at least $65 billion to investors this year in the form of dividends and stock buybacks. The total could be as much as $80 billion, depending on business performance, investment needs, and cash flow. If the total comes in at the high end of the range, it would be about five times more than in 2020. The initiative reflects how Samsung has benefited from the global boom in artificial intelligence infrastructure investment.

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